Friday, March 18, 2011

Bleak Data Shows U.S. Housing Far From Recovery

After a sharp January rise, construction of new US housing units plunged 22.5% in February, coming close to an all-time-low level set in March 1984.

While the January increase seemed like good news, it was due to an 87.4% surge in apartment starts — not single-family homes.

However, multi-family units subsequently dropped 46.1% in February.

Housing starts fell across all four regions of the country, with single-family housing starts hitting a record low in the Midwest.

The decline in housing starts is likely the start of a longer trend. Requests for permits to start new projects fell to a five-decade low.

Single-family homes — which make up roughly 80 percent of home construction — are the bellwether of the housing market and permit requests for single-family homes saw the biggest decline.

There are obvious reasons for these developments.

Due to the excess supply of existing homes, there's no need for new housing. Buyers are looking for cheaper foreclosures and short sales.

Slumping home prices have resulted in one of the best buyer's markets in memory, making this the wrong environment for builders to begin constructing new homes.

Even the good news comes with a caveat.

Data from the National Association of Realtors reveals that sales of previously owned homes climbed unexpectedly in January, to the highest level in eight months.

However, that increase was led by investors taking advantage of lower prices in distressed properties. Those investors are snatching up multiple properties, hoping to flip them for a profit. It's a decision they may come to regret.

Home sales remain slow and prices continue to fall. So it's little wonder that starts are down. The combination of all three factors points to just how far the market is from any sort of meaningful recovery.

Unemployment remains stubbornly high and housing inventories are excessively high. There were one million foreclosures in the US last year and an additional million are anticipated this year, which will push home prices down even further.

For all these reasons, potential buyers remain on the sidelines, cautiously watching and waiting.

A housing recovery will take many years and most people seem to recognize this. Consequently, the national sentiment is quite bad.

Case in point; the National Association of Home Builders said its index of industry sentiment for March improved slightly to 17.

While even a small improvement should be viewed as good news, any reading below 50 indicates negative sentiment about the housing market's future, and the index hasn't been above that level since April 2006.

Millions of construction jobs were among those lost in the recession. Yet, the latest housing data will likely result in even further layoffs.

That's a problem because housing cannot fully recover until the employment picture improves.

Further, housing cannot recover until prices stop falling and we have true price discovery in the market. That cannot happen until all of the so-called 'shadow inventory' enters the market and is liquidated.

The shadow inventory includes foreclosed properties that have yet to reach the market (some of which are being held back by banks futilely waiting for a recovery) and properties that will soon enter the foreclosure process.

The Census Bureau reports that 18.8 million homes are currently vacant. This indicates that banks may be holding onto a massive number of properties without listing them.

A recent report by Standard & Poor's says there were 1.7 million homes either owned by the bank or in some stage of foreclosure at the end of the third quarter of 2010. It would take 44 months, at the current rate of sales, to sell them off — a 25% increase from the beginning of 2010.

However, the foreclosure problem could get even worse. Morgan Stanley says that 8 million foreclosure-bound homes have yet to hit the market.

That's because banks are taking far longer to foreclose on homes than in the past. Last year there were nearly 2.9 million homes that received some kind of foreclosure notice, causing banks to struggle to keep up with the sheer volume.

Additionally, court delays and political pressure have constricted the flow of foreclosures onto the market to a trickle.

Simply put, there are millions more foreclosures to come, which will swamp the already depressed housing market.

According to Zillow, a Seattle-based real estate reporting company, 27% of US homeowners are now ‘underwater’ in their home, owing more than the home is worth.

Laurie Goodman, senior managing director at Amherst Securities, reports that 1 in 5 distressed homeowners in the US faces, or may face, foreclosure. She says 11.5 million home loans are non-performing or highly distressed at present.

And, in February, reported that some 15.7 million homeowners had negative equity. These people aren't just underwater; they have no skin in the game. That makes them quite likely, if not certain, to default.

There is no end in sight. The housing sector will remain depressed for years to come. We are in a long term buyer's market, which is great for younger, first-time buyers.

The downside is that many people will remain trapped in their homes, unable to sell due to negative equity. Many will default, while others will continue paying the mortgage on a home that may never be worth what they paid for it.

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